It’s been a strange year for the major asset markets so far, as the world’s central banks are just itching to start tightening their monetary policies. The bond markets have been among the hardest-hit asset markets, although equities have had their own problems. Nonetheless, Bank of America Merrill Lynch strategists feel we’re in the middle of a cycle, so they advise investors to “buy the dip.”

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Central banks trigger wobbly asset markets

Strategists James Barty and Mark Capleton said in a recent note to investors that asset markets have wobbled due to sabre rattling by central banks. They said the equity markets in particular were "choppy" during the month of June because policymakers were threatening to start tightening policy. The U.S. Federal Reserve kicked things off by tightening and then announced their balance sheet rundown, but now the People's Bank of China, the Bank of England, and the European Central Bank joined the party.

The BAML team clarifies that the beginning of tightening and the mini taper tantrum that ensued doesn't come as a surprise to anyone because it was to be expected as the global economy improves. However, the problem is that the bond markets were starting to signal questions about whether or not monetary policy should be tightened.

Buy the dip mid-cycle

They expect the global upswing to continue, but they note that the both OECD lead indicators and some business surveys appear to have peaked.

asset markets

They add that usually, asset markets struggle for a short while after peaks such as this one, but they believe that this has been nothing but a mid-cycle slowdown. As a result, they advise investors to buy any dip in any of the asset markets, given that inflation remains low and there is still slack in the global economy. Further, in some nations, the recovery has only just begun.

asset markets

The BAML team adds that looking 12 months out from a mid-cycle peak, global equities have risen more than 15%, on average. They especially like the equity markets in Asia excluding Japan, the Nikkei and Europe.

Complacent asset markets

The BAML team noted that they said earlier this year that the bond markets were probably rather complacent when it comes to tightening by the world's central banks. They add that mostly, they were thinking about the U.S. bond market, but they said that now the governors of the world's other central banks have reminded investors that when growth improves, monetary policy should be adjusted.

asset markets

They felt that "very low inflation" may limit a central bank's ability to maneuver, but they "seem determined to act" whenever "growth is fine," Barty and Capleton state. As a result, they expect this to "keep the bond markets on the back foot."

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